News that the company is mulling a direct listing rather than an IPO spurred plenty of confusion. How could it all shake out?
On Thursday, the Wall Street Journal reported that Spotify — long rumored to be planning an IPO in the next year — might remix its plans. Instead, the report claimed the world’s largest streaming service would go public with a direct listing, rather than an Initial Public Offering, an option that is much more common for smaller companies that don’t expect a big publicity splash when entering the market, and one that is exceedingly rare for a company that, well, makes a big splash with just about every move it makes.
An important caveat: Spotify was said to be “seriously considering” the move, meaning it’s not set in stone, and the company itself declined to comment. But the report raises several questions: some complicated, some more straightforward.
Here’s a breakdown of what it means, why it’s important, and what it could lead to down the road.
What is an IPO?
When a private company takes itself public, it generally does so with an IPO, or Initial Public Offering, in which it lists itself on a stock exchange by offering new shares of the company to the public at a set price that, taken collectively, adds up to the total value of the company. In an open market, the demand (or lack thereof) of stocks in a particular company determines the rise and fall of its stock price; the higher the demand, the higher the price, the higher the value of the company and the more money the company makes.
In order to offer an IPO, a company hires an underwriter (read: a bank with a hefty fee) that prepares the public offering; handling regulations, assessing and accruing demand, issuing reports from its analysts and connecting the company to potential investors that would form a viable backbone to support the business model — generally long-term investors that won’t flip shares quickly and leave the stock in an unstable condition. But most importantly, the underwriter will use its connections in the financial world to come up with a valuation — essentially the opening stock price — that becomes the accepted consensus of how much each share is worth on the stock exchange. (For reference, at press time Apple’s stock price was $143.54; Google’s $842.81; Amazon’s $894.96.)
“A company’s dream investor is a big one, like a Fidelity, who would come in and buy the shares, even if there’s no profitability, but they believe there’s a path to profitability and believe in the story,” explains Santosh Rao, head of research at Manhattan Venture Partners. “The worst thing that can happen to a company at an IPO is someone who buys the IPO and flips it around, or sells it right away; then the stock goes down, the reputation goes down, and then it’s tough to build that back.”
What is a direct listing?
A direct listing is a way to list a company on a stock exchange without issuing new shares to the public; it’s like an IPO, but without offering the public a way in unless someone within the company already wants to sell. With no new shares to offer to the public, there is no underwriter, and thus there is no consensus valuation of how much money the company is worth outside of its own self-valuation.
Spotify was last valued at $8.5 billion — in June 2015, when it had 20 million global subscribers and no real competitors in its sector (Apple Music would…